High Ratio of Interest-Only Loans Brings Concern

Responding to concerns that low interest rates and sharp competition are causing some pockets of the property market to overheat, big banks are approving more interest-only home loans – many of which have a high loan-to-value ratio (LVR).

Because the loan is more than 80% of the value of the property, high LVR is risky lending. However, Australian Prudential Regulation Authority data recently showed that loans of this type represent more than 30% of all loans approved by the big banks in the June quarter.

Scott Manning, a JP Morgan analyst, suspects that - following recent actions in New Zealand to place a ‘speed limit’ on loans - high LVR lending is likely to come under increased scrutiny in Australia.

Manning is of the opinion that while this may be in keeping with previous standards, greater scrutiny may be performed due to the increasing cost of domestic housing.

The Reserve Bank of New Zealand has released its new rules that limit LVR loans above 80% to 15% of new loans.

Although the Reserve Bank of Australia is not expected to introduce rules such as this because of the softer credit growth in Australia, many real estate agents are concerned by the ‘hot’ conditions that are affecting established housing in inner-city areas.

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